1. A Gilt edged security ("Gilt") is a bond issued (nowadays) by the UK Treasury and backed by HM Government. It is a method of borrowing money, and Gilts form part of the National Debt. Gilts are in the form of securities and can, therefore, be bought and sold on a stock market. A holder of a Gilt earns a defined rate of interest, known as the coupon, on its face value and the Gilt will be redeemed (generally) at a specified future date at its face value. Most Gilts are redeemable on a specified date and carry a coupon at a fixed rate of interest. These Gilts are known as "Conventional Gilts".
2. Although the Government may issue bonds in various currencies, the term "Gilt" generally refers to securities denominated in sterling. Other borrowers, including foreign governments, local authorities, financial institutions and companies, borrow by issuing bonds which are traded in a similar way to Gilts.
3. As the Government is expected to pay all its debts in full and on the scheduled dates, when an investor buys a Gilt, he/she is making a "risk free" investment. When an investor chooses to buy a non-Gilt bond rather than a Gilt he/she may be assuming certain risks and will, therefore, expect to earn a higher return than by investing in Gilts. This additional return is called the "risk margin", or more colloquially, the "spread".
4. The risk margin will reflect a number of risks. Where the issuer is not considered as creditworthy as the Government, a large proportion of this margin compensates the investor for credit risk (the risk that the principal and coupon payments are not made in full and/or on time). The rest of the margin reflects a number of factors including relative supply and demand for the bond, market risks and liquidity (described below).